Table of Contents
Introduction
Play-to-earn gaming (P2E) has become a popular phenomenon in the crypto space, allowing players to extract value in the form of cryptocurrency assets through their time and energy spent playing games. In this article, we will explore what play-to-earn games are, provide examples of popular games in this category, and discuss the potential tax implications of earning and trading gaming rewards.
What are Play-to-Earn Games?
Play-to-earn games are video games that enable players to earn cryptocurrency assets, such as tokens and non-fungible tokens (NFTs), by playing and engaging with the game. Unlike traditional video games where in-game items are owned by the game companies and cannot be transferred or sold, play-to-earn games utilize blockchain technology to give players ownership and control over their in-game assets.
These games allow players to earn valuable assets within the game, which can then be sold or traded on blockchain-based marketplaces for real-world money or other cryptocurrencies. This has created a new opportunity for players to earn a living wage by playing games and selling their earned assets.
Examples of Play-to-Earn Games
Here are some popular examples of play-to-earn games:
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Axie Infinity: Axie Infinity is a game centered around collectible characters called “Axies.” These Ethereum-based NFTs can be collected, bred, raised, battled, and traded on the Ronin network. Players can earn “love potions” by winning battles, which can be sold for AXS tokens.
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Splinterlands: Splinterlands is a strategic card game built on blockchain technology. Players can buy, sell, and trade their digital cards freely, just like physical cards. All transactions are recorded publicly and immutably on the blockchain.
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Gods Unchained: In Gods Unchained, players collect NFT cards to compete against each other in 1-on-1 matches. These cards can be bought, sold, and traded. By completing daily quests, players can earn the in-game currency known as “GODS,” which can be sold on exchanges or used to buy more cards.
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DeFi Kingdoms: DeFi Kingdoms is a game, decentralized exchange (DEX), liquidity pool, and market for utility-driven NFTs. Built on the Harmony ONE platform using the Uniswap V2 Protocol, players can use their in-game assets to participate in trades, sales, staking programs, and more.
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The Sandbox: The Sandbox is a blockchain-based game where players can build, craft, and survive in a virtual world. Players can buy NFTs called LAND to build structures or embark on quests to earn the in-game currency called SAND. The SAND token can be sold on exchanges.
Tax Implications of Play-to-Earn Gaming Rewards
While the tax treatment of play-to-earn gaming rewards varies across jurisdictions, there are two potential ways in which these rewards may be taxed: as income or as capital gains.
Gaming Rewards as Income
Certain activities in play-to-earn games may be considered taxable income. These activities include:
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Airdrops from the game company: If a play-to-earn game company distributes tokens or other assets to players as a reward or promotional activity, these airdrops may be seen as taxable income.
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Staking in-game assets for a yield: If players stake their in-game assets to earn additional tokens or rewards, the yield generated from this activity may be considered taxable income.
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Earning tokens by playing: The tokens or assets earned by players through gameplay may be viewed as taxable income, especially if they have a recognizable value outside of the game.
For example, if a player named Cobie earns 10 GAME tokens by completing daily quests and then stakes these tokens in a pool to earn an additional 1 GAME token each day, the initial earning of 10 tokens and the subsequent daily rewards may be seen as taxable income.
Trading Gaming Rewards as Capital Gains
The trading or selling of in-game assets acquired through play-to-earn games may be subject to capital gains tax. Examples of potential capital gains taxable events include:
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Selling an in-game asset: When a player sells an in-game asset, such as an NFT or token, for real-world money or other cryptocurrencies, the profit made from the sale may be considered a capital gain.
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Swapping one in-game asset for another: If a player exchanges or swaps one in-game asset for another, the difference in value between the two assets may be subject to capital gains tax.
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Purchasing an in-game asset with crypto: When a player uses cryptocurrency to purchase an in-game asset, the difference in value between the cost of the cryptocurrency and the value of the asset may be seen as a capital gain.
For instance, if Cobie sells an ultra-rare card he already owns for 1ETH on an NFT marketplace, the profit made from the sale would likely be considered a capital gain.
Tax Considerations and Seeking Professional Advice
It’s important to note that play-to-earn games and their tax implications are still a gray area in many jurisdictions. Tax authorities have yet to provide clear guidelines on how to treat these activities for tax purposes. Therefore, it is advisable to consult with a tax professional or accountant who is familiar with cryptocurrency and gaming taxation in your specific jurisdiction.
When it comes to reporting and filing taxes on play-to-earn gaming rewards, using a reliable cryptocurrency tax software like CryptoTaxCalculator can be highly beneficial. The platform can help you import relevant wallet addresses linked to your play-to-earn activity and categorize the majority of transactions accordingly. It also provides the flexibility to manually categorize any remaining transactions as buys, sells, transfers, airdrops, and more, simplifying the process of calculating and reporting your taxable events.
In conclusion, play-to-earn gaming has opened up new opportunities for players to earn real-world value through their gaming activities. However, it’s essential to understand the potential tax implications and seek professional advice to ensure compliance with tax regulations in your jurisdiction.
